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After-hours Trading Re-visited

A year ago we looked at after-hours trading and we decided it was time to re-visit this ďmarketĒ.    On our last review of after-hours (and before-hours) trading a year ago, some of the brokerage firms offered after-hours trading and some didnít.  Now, virtually all firms offer this form of trading.  A year ago we found that most firms had aligned themselves with only one or a couple of the ECNís (Electronic Communication Networks) where these after-hour trades actually take place, but they may not have a relationship with all 10 available ECNís.  This is still true.  So, depending on who your broker does business with you may be buying a stock on one ECN at a price higher than it is available on another ECN they donít have a relationship with.    The same holds true for when youíre selling a stock, you may not get the best price.  Since these ECNís are essentially 10 individual electronic markets, there is no guarantee a stock isnít trading at a different price on a different market.  Watch CNBC after the trading day and you will see newspeople reporting from different ECNís.  They provide this separate coverage because the trading activity is unique to each ECN.  Volume in the after-market is usually very thin. Dangerously thin!  If you are trying to sell 500 shares of a stock you may receive a progressively lower price for each 100-share block of stock if youíre brave enough to enter a market order.  If you enter a limit order you may only be able to get a partial fill on your order.  Depending on how your brokerage charges commissions you may be charged a fee for each lot filled at a different price.  Itís almost a given that in the after-hours market you will be buying a stock at a price higher than it closed at in regular trading, and you will be receiving a lower price for your shares when you go to sell a stock.  Other pitfalls to watch out for include: limit orders entered during regular trading may not be executed after hours even if the price is hit.  Orders entered specifically for the after-hours market will cancel at the end of the after-hours session and wonít carry over to the next day.  As negative as we sound on after-hours trading, there is a place for it and every investor should have an account that allows for after-hours trading.  Most companies release earnings after the close of the regular trading day ends, and by entering an order in after-hours trading you might be able to dump a dog or buy a winner ahead of the bulk of other investors.  For example, last year ICGE was trading at $17 on the day it was scheduled to release earnings after-the-bell.  It dropped to $11 after poor earnings were released, but getting an $11 execution beat the $8 price the stock opened at the next day during regular trading.  We believe every investor should have access to after-hours trading, but given the pitfalls we feel most traders should avoid using it.

   
 
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